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Eskom’s Implementation of the De Villiers Commission

Come 1984, Escom (Escom and Eskom will be used interchangeably) was flagging. In response to protests against the electricity monopoly, then president, PW Botha, appointed the De Villiers Commission of Inquiry to investigate solutions to the institutions problems.[1] This Commission had the fundamental purpose of restructuring the management of Escom to transform the institution into a more sustainable and effective electricity producer. South Africa, at the time, was facing more than just electricity trouble, however, and was challenged by internal and external political pressure, rising inflation, a flagging economy and a refusal by foreign creditors to finance state institutions.

This essay will be examining the recommendations made by the De Villiers Commission of Inquiry and reviewing the implementation of these recommendations by Escom/Eskom. This essay will ultimately find that the recommendations were, for the most part, followed by Eskom, but that they were ineffective at saving the institution in the long term, partly due to the conflicting nature of the prescriptions.

The De Villiers Commission recommended that Escom adopt a two-tier management structure, in order to better allow different stakeholders from the public and private sector to inform the decision-making of the institution.[2] Steyn argues that the main thrust of the De Villiers Commission was aimed at restructuring the management of Escom to improve incentives.[3] In 1985, Escom Chairman, John Maree, reported that Escom had adopted the new two-tier system, splitting the institution’s management into an Electricity Council and Management Board.[4] This was, of course, imposed upon Escom in the 1985 amendment to the Electricity Bill.[5] The former was made up of a myriad of public and private sector individuals and had the task of formulating policy for the development of Escom.[6] The Management Board was also appointed and exists to ensure the smooth day-to-day running of Escom. This recommendation by the Commission was implemented and, despite some minor misgivings aired in the 1985 annual report, was adopted relatively smoothly.

The Commission recommended that Escom adopt a system that conserves electricity usage while maintaining low prices.[7] Economically, this is a questionable prescription. Prices are one of the key methods of influencing demand and maintaining supply. The most reliable way to conserve a resource, such as electricity, is to raise the price. But, as the Commission states, electricity needs to be kept cheap so to enable wealth creation.[8] It is unclear how Escom is meant to transition into a profitable business model while keeping prices and demand low, however.

Despite this, Escom shows attempts to work towards electricity conservation. This is seen in its pledge towards the goal in its annual reports, as well as a move to build a PR campaign to encourage conservation on the consumer-end.[9] This may not be necessary as demand has faltered due to the economic climate.[10] In practice, Escom implemented this inconsistently, as they went over capacity due to a lack of electricity demand.[11] As such, I would argue that this was a failure in implementation. While the 1985 annual report claims they are working towards a conservation programme, in practice they went over capacity by not taking heed of lower demand. A conservation programme itself would have led to lower demand anyway, so they should have planned for this.

The Commission recommended that Escom work towards attaining maximum availability of its power stations to address demand.[12] This recommendation risks conflicting with the recommendation to conserve electricity, as it demands that generating capacity is kept available. To ensure this, extra power plants will need to be manned even if they are not in use. This generates a surplus. Due to the transient nature of electricity, this surplus cannot be stored and is wasted. It is unreasonable to ask that Escom maintain high availability while also lowering demand and costs. Escom evidently chose to rather maximise availability, constructing new plants that resulted in overcapacity.[13]

The De Villiers Commission forecasted a consumption growth rate of 5% per annum and advised that Escom take heed of this.[14] Escom did not and continued to raise capacity.[15] To pick up the shortfall of a loss of demand, Escom focused on cutting costs.[16] Unfortunately, new construction of power plants could not be halted and had to be considered a sunk cost.[17] Succinctly, this recommendation was not implemented by Escom, as the annual report acts surprised that their forecast of 7% was wrong, and that the Commission’s forecast was closer to the real number (4-5%).[18]

It was recommended that Escom transition to a business-like model that allows for profit.[19] They were also recommended to do this while maintaining low-costs of electricity, encouraging low demand (through conservation) and increasing availability. It cannot be said if this was implemented well at all, as the economic climate and political situation prevented Escom from turning a profit. In 1987, sales volumes did produce a good income, but rising operating costs negated this.[20] In addition, a lack of access to foreign loans further put the newly renamed Eskom under strain.[21] Despite an outwardly optimistic outlook that finances were fine, Eskom officials were rightfully afraid that they could not handle maintaining low prices with rising inflation for long.[22]

The Commission recommended that Escom adjust its tariffs in order to fund itself better.[23] Escom failed to implement this. Continually low prices and demand made fiscal stability hard. Eskom’s annual reports up until 1987 claim that they were doing fine, but this was only accomplished through heavy cost cutting.[24] Another telling sign that the new tariff system was either not implemented effectively or was ineffectual despite good implementation is that, in the 1987 annual report, it is stated that Eskom was investigating privatisation.[25] That is not the sign of a healthy state institution. It is clear that the National Party is no friend of privatisation, so either this was a last ditch effort for an exit strategy in case of political transition or, more likely, a sign that Eskom was heavily flagging.

The De Villiers Commission made interesting findings, even producing a more accurate consumption forecast than Escom, but its recommendations were not as effective. The conflicting prescriptions can be simply summarised as asking Escom/Eskom to keep costs low, while lowering demand and increasing supply. It is economically unsound. I do not, however, think that the De Villers Commission can be blamed solely for the impending doom of South Africa’s once flagship parastatal. The inability to take out additional foreign loans does push Eskom into a tight fiscal corner. Electricity is very capital intensive and, even with healthy demand, it would not be able to raise the necessary capital.

Overall, Escom/Eskom stuck to the recommendations as best they could. Rather, they should have paid more attention to the findings (such as the forecasts) and developed their own strategy. In the arena of international economics and the state of political South Africa at the time, however, even that may have not been enough.

References

Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Report of the Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Pretoria: Government Printer, [1984] (RP 18/1985).

Annual report. 1985-1987. Johannesburg: Eskom, [1986-1988].

House of Assembly Debates on Eskom. Pretoria: Government Printer, [1987].

Steyn, Grove. Eskom: Are we missing the opportunity to learn from history? https://www.gsb.uct.ac.za/files/BusinessDay_newspaper_article.pdf.

Footnotes

[1] Grove Steyn, Eskom: Are we missing the opportunity to learn from history? https://www.gsb.uct.ac.za/files/BusinessDay_newspaper_article.pdf, 1.

[2] Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Report of the Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Pretoria: Government Printer, [1984] (RP 18/1985), 15.

[3] Steyn, Eskom: Are we missing the opportunity to learn from history? 1.